As it happened, the IRU's 2002 Spring Conference in Las Vegas convened on the 6th month anniversary of the catastrophe which occurred on September 11, 2001. Nevertheless, the renewed camaraderie and delightful venue certainly rejuvenated members' spirits during this very informative meeting.

Once again, our Executive Director, Mary K. Clancy, and Program Chair, Tony Joseph, demonstrated their exemplary skills in formulating a program beneficial to the soul and the intellect of IRU members, more than compensating for the cancellation of last Fall's conference.

Following President Gordon Olver's opening remarks, the RAA's Marsha Cohen, a long time friend and contributor to the IRU's educational pursuits, reviewed a number of issues being monitored by the RAA, most important of which was the congressional failure to enact federal catastrophe legislation to provide terrorism coverage.

Although the synergistic stars seemed to be properly aligned for the passage of such legislation, including widespread support from virtually all meaningful sectors, such issues as tort reform, anthrax, and Enron kept getting in the way. In the end, time simply ran out to finalize such legislation before the end of the congressional session.

Although the RAA remains proactive in their efforts to secure a terrorism backstop, Marsha emphasized that the solution must be come federal quarters, and that there are no "state" solutions to the problem. To that effect, finite capital is simply not equipped to cover exposure to infinite risk which therefore suggests the need for a federal option.

Unfortunately, it appears there is only a 25% chance for a federal solution which, even then, will only be possible if the private sector assumes significant risk-bearing responsibility; the focus of the legislation is very narrow in scope; and the federal role consists of a backstop role. All of these elements emanate from lessons learned from the initial attempts to pass the legislation last Fall.

Following the legislative update session, the assembled intermediaries and underwriters were treated to a spirited dialogue on a variety of market issues - post 9/11 - among a very distinguished panel consisting of Bill Adamson (former CEO of CNA Re), John Berger (President and CEO of Chubb Re), Ed Hochberg (Senior VP of PMA Re), Dennis Bunch (Senior VP of Fireman's Fund), Chris O'Kane (Chief Underwriting Officer of Wellington Underwriting Syndicate 2020 at Lloyd's) and Britt Newhouse (Managing Director of Guy Carpenter & Co.)

Given the variety of issues discussed during this extremely informative session, the following outline might be the best way to provide an overview of the intriguing commentary:

• 65% of the WTC insured loss will be borne by reinsurers.
• The magnitude of 9/11 claims has clearly caused cash flow problems among certain companies, many of which have adopted a slow-pay mentality.
• The collectibility of retrocessions has become an area of regulatory concern.
• Coverage availability for certain exposures has tightened considerably.
• Shareholders have become more aware of the volatility of their investments.
• Although new money has rushed into the market - much like the aftermath of Hurricane Andrew - rates are already mitigating and causing the need for both new and old money to re-strategize their options.
• The talent shortage has worsened considerably.
• Underwriting discipline has been re-emphasized.
• Many treaty relationships have lost continuity and must now be treated as one-off facultative deals.
• The disparity between the market "haves" and "have nots" has increased dramatically.
• Bermuda has clearly become the dominant marketplace, and will continue to wield enormous power.
• Reinsurance market capacity, while considerable in certain areas, has been cut in half in other areas, causing insurers to drastically scale down their own capabilities.
• Expectations that the current market is likely to soften again in 2004.
• Although there is clear market need to serve its customers, there is even a greater need to overcome failed performance to shareholders.
• Underwriters are faced with an increasing need to quantify risk, and not give away more than priced for.
• The terrorism attacks have further demonstrated that urban accumulations have not been properly recognized to date.
• Need to emphasize "individual" behavior at the expense of "collective" behavior which can lead to ruin.
• Despite the availability of "traditional" reinsurance capacity, there is still room for "finite risk" products to fill certain coverage gaps and provide viable risk financing options.
• The Enron crisis has created paranoia among the accounting profession which has adversely impacted innovative risk financing options, at least in the short term.
• Despite the impact of WTC, only a handful of markets have disappeared.
• The influx of new money into the reinsurance market has been driven by the "nowhere else to invest" mentality, given the doldrums in other financial quarters.
• Sloppy wordings are creating coverage and claim problems between insurers and reinsurers.
• Need for increased focus on contract wordings which need to survive the time when the parties are no longer friends.
• Contract wordings will dictate treatment of 9/11 claims. Regardless whether the industry deems the WTC attack as one or two events, "what the wording says" will determine coverage.
• The use and viability of captives and fronting operations are driven by "spikes" in availability and pricing of standard risk transfer mechanisms.
• Volatility will impact the value of reinsurance operations within large corporate families.

The panel clearly touched on such a wide range of issues as to leave the audience with much food for thought for consideration during the afternoon's festivities on or around Reflection Bay.

For the first time in many, many years, the traditional mid-session dinner included a very animated presentation by Bob Hartwig, Vice President and Chief Economist of the Insurance Institute, who further discussed insurance and reinsurance implications from the "shadow of 9/11."

Based on a copy of his excellent presentation which precluded the need to bring a note pad to the dinner table, Mr. Hartwig's comments provided the following items of particular interest.

• Although the market was immediately shocked by the 9/11 attack, it did not panic, but instead reassured the world that insurers could and would pay claims.
• Industry loss estimates from 9/11 currently range from $30B to $70B.
• The allocation of a $40B estimate is projected to be as follows:
  • Business Interruption $10.0 (25%)
  • Other Liability $10.0 (25%)
  • Other Property $ 5.0 (12%)
  • Workers Comp $ 3.5 ( 9%)
  • Aviation Liability $ 3.5 ( 9%)
  • Property (WTC 1&2) $ 3.5 ( 9%)
  • Life $ 2.7 ( 7%)
  • Event Cancellation $ 1.0 ( 3%)
  • Aviation Hull $ .5 ( 1%)

• According to a recent GAO report,
  • Insurers are shifting terrorism risk to property owners/businesses
  • As business exposure to uninsured risks rise, so do potential economic consequences.
  • Potential economic consequences of not having terrorism insurance are cause for concern.

• With 2001 already a lost cause, P/C insurers took $5.5 billion in miscellaneous charges against their 2001:Q4 results.

In concluding his remarks, Mr. Hartwig made the following observations pertaining to the demand for insurance following WTC:

• The WTC attack will increase risk aversion
• Buyers will rediscover the value of insurance
• Demand for traditional risk transfer will rise
• Financial stability of insurance carriers will be valued.

• There is a need for even more rate increases.
• Pressures from declining interest rates should further reinforce rate increases.
• Venture capital is looking for 20% ROE which translates into the need to write a tremendous amount of business to support that capital.
• Asbestos exposures continue to loom large, with more targets created in the aftermath of the many insolvencies post Johns Mansville.
• The Bermuda markets were not huge factors in reinsurance placements at January 1, 2002, but will be more active at 4/1 and subsequent periods.
• Only 10% of the new capital was deployed at 1/1/02, with 75% of that capital likely to be deployed at 1/1/03.
• Exit strategies for the new capital are likely to begin in mid '03.

Following Mr. Zuckerberg's remarks, Dr. Gene Corley (Senior VP- Construction Technologies Laboratories, Inc.) and William Faschan (Partner - Leslie E. Robertson Associates, RLLP) gave an informative, and at times, a moving presentation which focused on the engineering aspects of the World Trade Center loss. Of considerable interest were the following comments and observations:

• There are 23 members of a team which has devoted their time and effort to analyzing the performance of the WTC, and their report will be available shortly.
• A major focus of the study was the importance of jet fuel in their findings.
• Although the impact of a jet crash was considered in the construction of WTC, such impact was predicated on the velocity of a Boeing 707, either in the process of taking off or landing, not the impact of a Boeing 767 travelling at twice the speed, with 4 times the energy.
• Even with the tremendous impact of the crashes, the redundancies in construction safeguards enabled the buildings to remain standing for 4 hours thereafter.

Last, but certainly not least, Gerry Sullivan (President and CEO of Gerald J. Sullivan & Associates, Inc.) reviewed the changing nature of the Surplus Lines market.

A very key element of Mr. Sullivan's remarks was that, although Surplus Lines represents only a small fraction (perhaps 4-5%) of the Property/Casualty volume, the market has developed a very important niche as the "safety valve" of the insurance business.

Although the Surplus Lines market has been accused of having higher loss ratios and a greater rate of insolvencies, it has actually fared as well, if not better than the "standard" market. The Surplus Lines community is also enjoying a period of rapid growth stemming from the current contraction/tightening of the more traditional market, but may have difficulty absorbing the medical malpractice business made available from the St. Paul's defection from that class.

Finally, this newsletter would not be complete without recognizing

• Jed Berry, the IRU's intern of the year, who is now a valued staff member at CNA Re, and
• Scott Norris, this year's recipient of the George D. Young Award for Professional Excellence.

For those who could not attend the 2002 Spring Conference, you missed a very enjoyable and enlightening session. Not only were the venue and speakers first rate, but the opportunity to catch up with old friends, and network with new ones, made this conference particularly special.

Hope to see you at Seaview!

Paul Walther
Editor, Journal of Reinsurance